'Can of worms': Franchising in the royal commission's sights

The scrutiny on the nation's $170 billion franchising industry is set to intensify as lending to the troubled sector is examined this week at the banking royal commission.

Franchising has already been under the spotlight after a series of scandals led to the establishment of a parlimentary inquiry, which is still underway.

Commissioner Kenneth Hayne has commenced the third round of hearings for the financial services royal commission.

Photo: Eddie Jim

The royal commission started two weeks of hearings in Melbourne on Monday considering small businesses and counsel assisting the commission, Michael Hodge, said several franchisees would appear before it.

"A number of case studies that we will deal with in the following two weeks deal with or involvefranchises," he said.

A theme of recent scandals has been that franchisees are left without enough money to live on once they pay interest on loans they took out to buy a store.

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Former Australian Competition and Consumer Commission chairman Allan Fels, who ran the worker compensation scheme at 7-Eleven and led a taskforce into exploitation of migrant workers, said the move by the royal commission would be significant.

Borrowers giving evidence

One case study will concern business credit facilities provided by ANZ in relation to the purchase of a gelato franchise.

Another borrower will give evidence about Westpac's assessment of the suitability of a loan provided for the purposes of purchasing a Pie Face franchise "and the effect on her financial well-being when the franchise failed".

A third borrower will give evidence about the credit assessment undertaken by Bank of Queensland in relation to her entering into a business loan to purchase two franchises in a shopping centre in Adelaide.

Carolyn Flanagan, who appeared before the royal commission on Monday.

Photo: Elke Meitzel

"All three of these case studies will allow the exploration of the approach of banks to assessing the suitability of a business loan and the potential profitability of a business, particularly where personal assets are used to secure the loan," Mr Hodge said.

The commission's first case study for this round of hearings, Carolyn Flanagan, also involved a franchise.

The growth of franchising

Mr Hodge stressed the significance of franchising in the small business sector, citing the Franchise Council of Australia's 2016 report. It shows the number of franchise businesses operating in Australia continues to grow, having almost doubled over the past 20 years to 79,000 franchise businesses by 1998.

As at 2016, almost half a million Australians were employed in the franchising sector.

Franchising inquiry

Senator John Williams instigated parliament's franchise inquiry and told Fairfax Media even though public hearings haven't yet commenced, the inquiry had heard many sad stories.

"It would be a very good thing for Commissioner Hayne and his team to hear about business lending concerning franchisees," he said. "Clearly there are thousands of good ones but there are some problems."

Senator Williams says problems faced by franchisees include some saying they were not given a full complete copy of the books of the business they were buying and some saying they were expected to work for nothing.

"You can't work for nothing and make payments on your loan to buy the franchise you have to make money to pay off your debts," Mr Williams said.

"I think it's good if the royal commission gets some evidence from the franchise industry and it will be interesting to see in time what commissioner Hayne says compared to what the committee says, to compare the two."